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Psychosociological Issues in Human Resource Management 5(1), 2017 pp. 160–175, ISSN 2332-399X, eISSN 2377-0716 doi:10.22381/PIHRM5120175

LEADING WITH COMPASSION: THE KEY TO CHANGING

THE ORGANIZATIONAL CULTURE AND ACHIEVING SUCCESS

HERSHEY H. FRIEDMAN x.friedman@att.net

Department of Business Management, Murray Koppelman School of Business,

Brooklyn College, City University of New York

MIRIAM GERSTEIN mgerstein1@gmail.com

Department of Accounting, Murray Koppelman School of Business,

Brooklyn College, City University of New York

ABSTRACT. There is a leadership crisis in the world today that is affecting government, business, and education. Young people and Millennials are especially troubled over the lack of values displayed by leaders. This paper demonstrates why it is important for organizations to practice compassion, empathy, and caring and make them core values. This means that organizations that want to thrive must be run by compassionate leaders. A culture of compassion and caring must permeate the entire organization. This is especially crucial in toxic organizations and/or where employees are disengaged. JEL codes: D73; L2; J21

Keywords: leadership; compassion; corporate fraud; accounting scandals; care ethics; Conscious Capitalism; empathy

How to cite: Friedman, Hershey H., and Miriam Gerstein (2017), “Leading with Compassion: The Key to Changing the Organizational Culture and Achieving Success,” Psychosociological Issues in Human Resource Management 5(1): 160–175.

Received 13 July 2016 • Received in revised form 13 August 2016 Accepted 13 August 2016 • Available online 30 August 2016

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Introduction There is a leadership crisis in the world today that is affecting government, business, and education. Young people are especially troubled over the lack of values displayed by leaders. Corporate leaders seem to be only concerned about finding ways to inflate their own salaries than in ensuring fair wages for employees. Of course, this does not stop CEOs from milking their firms. According to the World Economic Forum (2014) study:

Most people’s understanding of a lack of values in leadership probably relates to the problem of leaders simply caring about their own interests, rather than being motivated by something more worthwhile. We expect leaders not to just stick to what they know, but to be driven by something that moves us forward and brings people together. And so, in reality, the concern is that there’s not enough sharing of views, values and vision (World Economic Forum, 2014).

Despite all the talk about corporate social responsibility and business ethics, corporate leaders appear to be only interested in maximizing their own salaries rather than in ensuring fair wages for employees. Top CEOs now make approximately 300 times more than the typical employee (Mishel & Davis, 2015a). It appears that CEOs are reaping the rewards when they have little to do with successful performance of their companies; luck or chance usually has a greater effect on firm performance than the CEO’s talents (Fitza, 2013). Chance appears to account for 70% of corporate performance. One study examining compensation among the top 200 companies using return on capital as a measure of CEO performance found that 74 out of the 200 firms overpaid their CEOs (Morgenson, 2016). CEO pay is up 997% since 1978 (Mishel & Davis, 2015b). The median real salary (adjusted for inflation) of American male workers is $726 less per year than in 1973; women are making $1,154 less than in 1977 (Sanders, 2016).

The employment-population ratio, which is probably a more important measure than the unemployment rate, was above 63% before the Great Re- cession of 2008 and is currently at 59.7% (http://data.bls.gov/timeseries/ LNS12300000). This does not bode well for the future.

Corporate fraud is a serious problem. In the United States, a single type of corporate fraud involving corporate securities has been estimated to net its perpetrators $380 billion annually (Tillman & Pontell, 2016). Tillman & Pontell (2016) feel that corporations are not afraid of committing fraud for the following reason:

Theories of deterrence are based on a simple idea: that criminals, either individuals or corporations, behave rationally, weighing their actions against possible gains and consequences. To stop crime,

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we need to tip that calculation in society’s favor. Phil Angelides, the former chairman of the Financial Crisis Inquiry Commission, which examined the causes of the 2008 financial collapse, said the relatively small fines paid by corporations are ‘akin to someone who robs a 7-Eleven, takes $1,000 and being able to settle for $25 and no admission of wrongdoing.’ He added, ‘Will they do it again? Absolutely, because it pays’ (Tillman & Pontell, 2016).

The accounting industry has also been complicit in many of the scandals that have rocked the corporate world. Toshiba recently joined a long list of firms responsible for corporate accounting/financial scandals that includes BCCI, Enron, Olympus, Tyco International, Lehman Brothers, Royal Bank of Scotland, and Tesco (Farrell, 2015). The SEC filed 99 accounting-fraud investigations (a 46% increase from the previous year) in the fiscal year that ended September 30, 2014. In 2015, they started more than 100 investigations (Eaglesham & Rapoport, 2015). The Institute of Internal Auditors (2012) states the following regarding the crucial need for auditors to create a cor- porate culture where ethical decisions are made.

What rationalization does a company make to justify a corporate culture where ethics are ignored? In recent years, greed, fraud, and a lack of ethical conduct have led to the collapse of many organiza- tions. A variety of internal and external pressures can lead com- panies down the wrong path. And once the first misstep is taken, it’s a slippery slope to hurting stakeholders, the community, and your reputation (The Institute of Internal Auditors, 2012).

One reason given for all the accounting scandals is the pressure to achieve financial targets:

Bonuses and share options are often linked to hitting particular targets and these pressures may entice executives to engage in creative accounting. Companies can also manage their operations by delaying investments or selling assets to reach certain goals. As long as there are market pressures, we can expect some firms to resort to creative accounting to shore up their performance (Farrell, 2015).

Greed and a lack of fear of being punished may explain why a company such as Volkswagen was willing to cheat on emissions tests for its diesel cars. This dishonesty will cost the company at least $14.7 billion dollars in the United States alone and a tarnished reputation. There is talk of a criminal investigation of Volkswagen (Ewing & Tabuchi, 2016). Takata, a major airbag manufacturer, is in danger of going bankrupt for selling airbags that can explode. Its airbags have been linked to more than 100 injuries and 14 deaths. So far, 60 million vehicles have been recalled in the United States alone. The company is looking for a “white knight” to provide funds and

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rescue it. Shigehisa Takada, CEO and grandson of the founder, has been criticized as an ineffective leader and has told shareholders that he will step down. The most he has so far done was apologize to the victims while continuing to claim that the airbags manufactured by his company wer e “fundamentally safe” (Soble, 2016).

Government is also responsible for many of the problems facing this country. Gilens & Page (2014) examined more than 1,800 U.S. policies and assert that the United States political system does not serve the interest of the majority of Americans. Rather, it serves the needs of special interests such as corporations and hence the country resembles an oligarchy more than a democracy. One example that illustrates this is the problem of lead in the water supply of Flint, Michigan, where 4.9% of children tested have elevated lead levels (Hanna-Attisha et al., 2015). Unfortunately, the problem is much bigger than that and, according to the Centers for Disease Control and Prevention, 535,000 American children suffer from lead poisoning. This is due to greed on the part of the lead industry that fought against several anti- lead programs (Kristof, 2016).

The Deloitte Millennial Survey (Deloitte, 2016) involved 7,700 Millennials from 29 countries. The study showed that 66% of Millennials expect to leave their organizations by 2020. This indicates that many are not happy with their current jobs. Another key finding dealt with values:

So, to better understand their values, we asked Millennials, ‘What are the most important values a business should follow if it is to have long-term success?’ They responded that businesses should put employees first, and they should have a solid foundation of trust and integrity. Customer care and high-quality, reliable products also ranked relatively high in importance. Attention to the environ- ment and social responsibility were also mentioned by a significant number of Millennials. It’s noteworthy that few (5 percent) of those answering thought profit-focused values would ensure long-term success (Deloitte, 2016).

It is clear that Millennials strongly believe that “business success is built on a foundation of long-term sustainability rather than pursuing short-term profit maximization” (Deloitte, 2016). They want firms to put people before profits. What this means is that firms that want to retain the best employees need to hire new kinds of leaders. This paper will examine the kind of lead- ership that is needed for the creative economy with a workforce consisting mainly of Millennials.

Scalise (2007: 51) believes that “compassion is a new paradigm in which to understand economic, political, and cultural relationships.” One of the big surprises of the current presidential race in the United States is how much Donald Trump and Bernie Sanders have in common. Numerous articles have

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been written about this subject. The main thing these voters have in common is the belief that: “The system is rigged. Your elected leaders are working for themselves and their puppet-masters. They couldn’t care less about you” (Robinson, 2016). It is becoming more and more obvious that many Amer- icans feel that the established political parties have no interest in helping them, i.e., have no compassion for the working individual who is struggling to earn a living, and are only going through the motions of pretending that they will bring about constructive change. Several politicians have compared the Top 1% with the Bottom 99% and are that it is time for the United States to do something to help everyone, not just “the 1%.”

Why Leaders Must Have Compassion There are many traits leaders must have in order to successfully lead an organization or country. Traits that are discussed in the literature include trustworthiness, expertise, and vision (Kouzes & Posner, 2010). Untrust- worthiness is a major cause of leadership failure (Kouzes & Posner, 2010; Nahavandi, 2003:79). One trait that may be just as important is compassion, which translates into empathy and concern for employees, customers, and society. First, let us attempt to define compassion. Strauss et al. (2016) examined the literature and found that there is a lack of consensus regarding the definition of compassion. However, they come up with a five-element definition that includes the following components: “recognizing suffering in others; understanding the common humanity of this suffering; feeling emotionally connected with the person who is suffering, tolerating difficult feelings that may arise; and acting or being motivated to help the person.” They admit that no single definition in the literature includes all five of these components. Cherry (2014) provides a definition that might be of value.

Compassion is much more than just concern or empathy. Empathy involves the ability to feel the emotions that another person must be experiencing, but compassion is fueled by wanting to actually take action to help the other individual. One definition of com- passion suggests that it is a ‘deep feeling for and understanding of misery or suffering and the concomitant desire to promote its alleviation’ (Cherry, 2014).

Analysis of an assessment instrument that measures empathy and com- passion of college students shows that concern for the well-being of others has been tumbling since the early 1990s and is currently at the lowest point in the last 30 years (Desteno, 2015). It is not clear why this is happening. Research by Cassell (2009) cited in Cherry (2014) indicates that there are three requirements for a person to feel compassion: “The problem must be

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serious; the individual’s problems cannot be self-inflicted; and the observer must be able to identify with the victim’s suffering.” There may not be a perfect definition available for compassion but there is no question that it is recognized as an important construct in many areas including healthcare, education, and justice. This paper argues that it is also important in business.

Shahzad & Muller (2016) suggest that many scholars in the area of organization behavior see justice and compassion as incompatible. This does not have to be the case. In fact, compassion can be the secret ingredient that makes an organization thrive (Dutton & Workman, 2015; Dutton, Workman & Hardin, 2014; Frost, 1999). Peter Frost was among the first scholars to demonstrate that compassion will not interfere with the productivity and effi- ciency of an organization and will actually improve them (Frost, 1999). This is why an organization that wants to succeed should strive to be compas- sionate. Frost relates the story where he was in the hospital and witnessed a nurse going out of her way to comfort a patient who was “humiliated, depressed, [and] defeated.” This action was not only beneficial for the patient but helped the morale of the entire organization. As Dutton & Workman (2015) assert: “Certain types of positive experiences, like giving, receiving, or witnessing compassion, may activate positive spirals, increasing positive effects.”

The research on compassion is evocative of the theory of care ethics developed by Held (2006). Held believes that society cannot function properly if it is solely based on the profit-motive. Held (1993: 228–229) contends that “Many enterprises would gain if they resembled families more and groups of hostile strangers less.” She argues that “the markets are unable to reflect and actively advance values beyond the economic, such as mutually shared care and concern” (Hawk, 2011). Thus, care ethics is about introducing compassion and caring into society. A compassionate workplace is very beneficial in providing grief support after an employee experiences a loss or another kind of misfortune. Support from coworkers can help with a more rapid recovery (Tehan & Robinson, 2009).

Neubert et al. (2015) examine what they call spiritual capital measured by how subjects respond to statements such as “I feel the presence of God or Allah in my relationships” and “I feel a deep sense of responsibility to reduce pain and suffering in the world.” The second question is essentially a measure of compassion. Surveying subjects who had received microfinance loans in Kenya and Indonesia, they find a significant relationship between spiritual capital and innovativeness and success in business. Compassionate love has been seen as an antecedent for servant leadership (van Dierendonck & Patterson, 2013).

Capitalism and compassion are not mutually exclusive. Adam Smith, the father of capitalism, understood that capitalism could not function well

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without benevolence and regulation. Adam Smith believed in the importance of morality and virtue and thought that the virtue of benevolence had the ability to counteract our most powerful selfish desires. In fact, he was con- fident that people would be willing to sacrifice their own selfish interests in order to help others (Gregoire, 2014). Smith understood that money and fame alone would not lead to happiness, which can only come from being loved, appreciated, and respected. Economist Russ Roberts called Smith’s The Theory of Moral Sentiments a “road map to happiness, goodness, and self-knowledge” (Gregoire, 2014).

Amartya Sen, Nobel Laureate and renowned economist, and others see Smith’s two works – The Theory of Moral Sentiments and The Wealth of Nations – as complementing each other: capitalism only works when combined with ethics and morality. Unfortunately, Smith’s philosophy has been distorted by people who insist that he believed in unfettered, predatory capitalism without a moral foundation. Sen (2010) was opposed to the idea of separating ethics from economics:

Second, since the ideas presented in The Wealth of Nations have been interpreted largely without reference to the framework already developed in Moral Sentiment (on which Smith draws substantially in the later book), the typical understanding of The Wealth of Nations has been constrained, to the detriment of economics as a subject. The neglect applies, among other issues, to the appreciation of the demands of rationality, the need for recognising the plurality of human motivations, the connections between ethics and economics, and the codependent rather than free-standing role of institutions in general, and free markets in particular, in the func- tioning of the economy (Sen, 2010).

What Smith actually stated in The Theory of Moral Sentiments (1759) was that economic growth depended on morality:

Man… ought to regard himself, not as something separated and detached, but as a citizen of the world, a member of the vast com- monwealth of nature and to the interest of this great community, he ought at all times to be willing that his own little interest should be sacrificed.

Robinson (2007) makes it very clear that Adam Smith did not believe that the human motive of profit maximization is a substitute for morality.

Adam Smith believed in a natural order of morality. When man was formed for society he was endowed with the moral sentiments which would make society possible. But the second part of his doctrine, the “Wealth of Nations,” has succeeded in undermining those sentiments to a very considerable extent and putting in their place the doctrine that the pursuit of profit is a substitute for

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morality… I hope that the moral consciousness which has grown up in modern times in the youth of America, which has led them to protest against the unequal balance prevailing between morality and the market, will continue to prosper in this generation and that you will find that the doctrines of Adam Smith are not to be taken in the form in which your professors are explaining them to you (Robinson, 2007).

Even Alan Greenspan, former chair of the Federal Reserve who has been called the “maestro of capitalism,” changed his views regarding laissez-faire capitalism once he saw how it nearly caused the collapse of the world financial system. The incredible risks taken by companies to increase bonuses for executives by issuing trillions of dollars of credit default swaps should have convinced the worst economists that unadulterated greed and self-interest is a formula for economic disaster. Greenspan actually said that he was “in a state of shocked disbelief” and that “I’ve found a flaw, I’ve been very distressed by the fact” (Porter, 2016). The flaw he found was that capitalism based solely on greed and unfettered markets does not work, which Adam Smith had recognized over two centuries earlier.

Models based on the mistaken belief that people are entirely driven by self-interest are wrong. There is quite a bit of evidence that people are altruistic and enjoy helping each other (Ricard, 2015). Several studies (and a 2000 film starring Kevin Spacey based on a book by Catherine Ryan Hyde) demonstrate what happens when people are on the receiving end of a kindness; they pay-it-forward. If people were only motivated by self-interest, there is no reason for this kind of behavior. Pay-it-forward is basically a chain of goodwill. Normally, we expect to return a favor (reciprocity) to the person who did something good for us. When paying it forward, the favor is paid back to someone else, a stranger, not the same person who helped us. Thus, if one driver pays the toll for the next driver in line, that individual pays for the next driver, and so on (Norton, 2014). There is a dark side to pay-it- forward. People who are treated poorly, will also respond in a negative way to others. In fact, “bad behavior leaves more of an impression on us than good” and “people pay greed forward as a means of dealing with negative emotions that being treated badly engender. If I can’t pay you back for being a jerk, my only option for feeling better is to be a jerk to someone else” (Norton, 2014).

Brooks (2016) challenges the views of classical economics and states:

By assuming that people are selfish, by prioritizing arrangements based on selfishness, we have encouraged selfish frames of mind. Maybe it’s time to upend classical economics and political science. Maybe it’s time to build institutions that harness people’s natural longing to do good.

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Compassion is a trait that can help a company flourish (Fox, 2010). Seppӓlӓ (2016), author of The Happiness Track, avers that “compassion is good for the bottom line, it’s great for your relationships and it inspires lasting loyalty. In addition, compassion significantly boosts your health.” Moreover, “the more compassionate the workplace, the higher the performance in profit- ability, productivity, customer satisfaction and employee engagement” (Global Focus, 2016).

Williams (2012) also makes a compelling argument that companies that seek to thrive need leaders with kindness, compassion and empathy. Com- passionate leadership is correlated with a 27% reduction in sick leave and a 46% reduction in disability pensions (Williams, 2012). Baker & O’Malley (2008) also argue that a management style that combines the traits of com- passion, gratitude, authenticity, humility, humor, and integrity will improve employee retention and employee performance and thereby improve the bottom line. According to Tischler (2007), autocratic CEOs are not effective leaders. In fact, “Farsighted, tolerant, humane and practical CEOs returned 758% over 10 years, versus 128% for the S&P 500” (Tischler, 2007).

Boedker conducted a major study in Australia involving 5,600 people in 77 organizations examining the link between profitability and leadership styles. He found that compassionate leadership had the greatest influence on productivity and profitability. The study defined compassionate leadership as the ability of leaders to value people and “to spend more time and effort developing and recognising their people, welcoming feedback, including criticism, and fostering co-operation among staff.” It also includes a desire “to understand people’s motivators, hopes and difficulties and to create the right support mechanism to allow people to be as good as they can be” (Business Think, 2012).

Ton (2014) examined several retailing firms and found that successful firms thrived by paying fair wages and respecting employees. Indeed, one retailer that took such a people-centered management approach achieved an annual turnover of 4% of employees, which is virtually unheard of for a retailer. Seppӓlӓ (2013) posits that managers often make the blunder of thinking that placing pressure on employees is the best way to get them to maximize performance. Actually, this approach often boomerangs and in- creases stress which has an adverse effect on health and performance. Research shows that many employees will look for another job because of stress and that they will remain loyal to their firm if they experience fairness and altruism in the workplace: Seppala cites Haidt’s work as demonstrating that:

seeing someone help another person creates a heightened state of well-being that Haidt calls “elevation.” Not only do we feel

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elevation when we watch a compassionate act, but we are then more likely to act with compassion ourselves.

When Haidt and his colleagues applied his research to a business setting, he found that when leaders were fair and self-sacrificing, their employees would experience elevation. As a consequence, they felt more loyal and committed and were more likely to act in a helpful and friendly way with other employees for no particular reason. In other words, if a manager is service-oriented and ethical, he is more likely to make his employees follow suit and to increase their commitment to him or her.

Elevation may even be a driving force behind creating a culture of compassion and kindness, whether in a workplace or in society at large. Social scientists James Fowler of UC San Diego and Nicolas Christakis of Harvard have demonstrated that helping is contagious: Acts of generosity, compassion, and kindness beget more generosity in a chain reaction of goodness. This is how culture is formed (Seppӓlӓ, 2013).

Can People Be Taught to Be Compassionate? Gerstein & Friedman (2016) list “empathy and compassion” as important skills that should be taught in higher education as well as K-12. They posit that these skills should also be taught in accounting programs. Cherry (2016) cites published research that demonstrates that adults can be taught to be more compassionate. A technique that can be used to teach compassion is com- passionate meditation, whose purpose is to produce caring feelings for other people who are suffering (Association for Psychological Science, 2013; Condon, Desbordes, Miller & DeSteno, 2013; Desteno, 2015).

Kim & Shy (2015) feel that an increasing number of companies believe that mindfulness is crucial for successful management. This is the reason NYU offers mini-courses, lectures, and symposiums as part of the Mindfulness in Business Initiative (MiB) to MBA students. Students are taught the funda- mentals of mindful leadership which includes creativity and compassion.

Discussion Compassion has been recognized as an important virtue in most of the world’s religions and is often a core value of most belief systems (Strauss et al., 2016). One of the biggest obstacles to creating a compassionate organization is the use of the machine paradigm which treats people as “automated cogs carrying out rigidly prescribed activities, creating a system that is intrinsically dehumanizing, and paradoxically inefficient” (de Zulueta, 2016). This may

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have much to do with Taylor’s (1911) outdated theory of scientific manage- ment which is over 100 years old and makes no sense in the knowledge- intensive economy (de Zulueta, 2016).

The idea that compassion is a critical trait for an effective leader has been expressed in Scripture thousands of years ago. In Psalm 72, King David, prays that Solomon, his son and successor, will do what it takes to be a successful ruler. The Psalm perfectly describes the mission of a king, the ultimate leader. It underscores that a successful leader is concerned with helping the weak and defenseless members of society and must have com- passion for the poor.

Please help the king to be honest and fair just like you, our God. Let him be honest and fair with all Your people, especially the poor. Let peace and justice rule every mountain and hill. Let the king defend the poor, rescue the homeless, and crush everyone who hurts them (Psalm 72: 1–4).

The Book of Proverbs stresses the importance of kindness, compassion, and justice for sustained leadership and characterizes greed as a trait that shortens a ruler’s reign:

Kindness and truth preserve a king; and by kindness he upholds his throne (Proverbs 20:28).

A ruler who lacks understanding is a great oppressor, but one who hates covetousness will prolong his days (Proverbs 28:16).

Brooks (2014) observes that “Capitalism on its own breeds people who are vaguely aware that they are not living the spiritually richest life, who are ill- equipped to know how they might do so…” Brooks concludes that capitalism without spiritual values such as ethics, integrity and compassion results in a corrupt, cruel and unforgiving society. This is what we are seeing today. Karakas & Sarigollu (2013) posit that the “concept of benevolent leadership can be used as a higher order construct that bridges diverse approaches to creating virtuous and compassionate organizations.” Reinhard Mohn, CEO of Bertelsmann, created a culture at his firm that stresses fairness and com- passion for all of humankind. With this approach, he was able to transform the company into a multimedia giant (Mohn, 2009).

Conscious Capitalism is an organization consisting of CEOs that believe the best way to grow a company is to understand that business is about con- siderably more than just maximizing shareholder value and making profits. They believe that executives should run their companies with the understand- ing that business has a higher purpose. The credo of conscious capitalists consisting of “Four Principles of Conscious Capitalism” is discussed on the organization’s website, which asserts that “…Conscious businesses will help evolve our world so that billions of people can flourish, leading lives infused

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with passion, purpose, love and creativity; a world of freedom, harmony, prosperity and compassion” (http://www.consciouscapitalism.org/node/4005).

de Zulueta (2016) reviews the healthcare literature and asserts: “there is a deep concern that modern healthcare has lost its moral compass and is struggling to provide safe, timely, and compassionate care to its citizens.” Dignity Health, headed by Lloyd H. Dean, is one of the country’s five largest healthcare providers and believes in compassionate health care. The company employs approximately 11,000 physicians and 56,000 employees in hospitals in 21 states. Dean is an advocate of the compassion model of business and has shared the podium with the Dalai Lama to speak about this subject. Dean asserts that “Where there’s kindness and compassion, the probability and quickness of healing rises exponentially.” Dean feels that the principle of compassion should be a core value of all kinds of businesses. Dignity Health is not the only organization that benefitted from a business model based on compassion. UCLA’s health system also improved its reputation immensely after focusing on compassion. Indeed, positive responses to the question, “Would you refer us to a friend?” shot up from the 38th percentile to the 99th percentile (Asghar, 2014).

Lack of employee engagement is a serious problem. Research by Gallup demonstrates that approximately 70% of American workers are disengaged, with much of this due to ineffective leadership (Harter & Adkins, 2015). This endemic alienation can be countered by corporate compassion. If a company wants a culture of caring and compassion to permeate the entire organization, it needs a compassionate leader. Compassion is contagious (as is bullying) and is needed when dealing with customers/clients, colleagues, employees, and society. It is important for all organizations, including accounting firms, colleges, hospitals, to develop a reputation for compassion. This is especially important in today’s creative economy where “Survey after survey shows that millennials want to work for companies that place a premium on employee welfare, offer flexible scheduling and, above all, bestow a sense of purpose” (Wortham, 2016).

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